The current economic system of extractive capitalism is riddled with inefficiencies and costs because it unnecessarily favours the wealthy. Housing, water systems, electricity supply, transportation, accounting, law, health, education and other capital-intensive industries and services are twice as expensive as they should be.
This article outlines community-first markets rather than the existing me-first competitive markets. Economic productivity is the money needed to produce a given quantity of goods. Speeding up investment money requires less Capital for investment and increases productivity. The speed of money we call Capital can be doubled with low-cost information system changes.
The freed Capital can be directed towards reversing environmental degradation and reducing wealth disparities. These changes may happen in time to establish a liveable planet, and reducing wealth disparities may reduce conflict between people.
The current economic system could be more efficient because competitive markets set prices where the profits from business activities go to the owners. The New Economy will keep markets to encourage variety and experimentation. However, prices are set by agreement to maximise the value to the community of the product each market serves. The resulting profits are shared according to the effort and needs of the community members.
The structure of governance is bottom-up fractal. At the bottom is the individual. The next level is a household, then a local community, then groups of local communities up to whatever level is needed. At each level, the members share profits and set prices for the services of the level above. The structure is not of people but of assets, with people connected to assets.
In the New Economy, a housing community is NOT a set of people who own dwellings. It is a set of houses that shelter people while the people collectively look after the houses. There is a mutual obligation between assets and people. Houses and people can come and go seamlessly from communities with little or no costs.
The political structures of people are separate and independent of the product and service asset structures.
The two following examples show the difference between me-first and community-first economic systems. The first creates money with bank loans, and the second is affordable housing. These are separate interlinked economic structures—one to distribute money and one for housing.
Money Creation
Banks create money, under license from the government, by making loans to borrowers. The Bank is responsible for the money; if the borrower does not pay it back, the Bank has to make up the money from its Capital. The Bank increases its Capital with profits from charging interest. The Bank must also take customer deposits (loans) and pay depositors interest.
Banks' costs are the risk of loans not being repaid, paying interest to depositors, and the operating costs of protecting and moving money. If they charge more for interest than their costs, they make a profit that they do not share with their borrowers. The profits are stored and later paid to their shareholders, with some going to the government.
The Reserve Bank uses the banking system to control the money supply, and it does this by changing the interest rate of the money they lend to the Banks. This changes the interest rates at which the banks pay and lend. If the Reserve Bank drops the interest rate, it punishes savers and benefits borrowers. If the Reserve Bank increases the rates, it benefits lenders and punishes borrowers. Poor people have few savings and try to reduce poverty by borrowing money. When the Reserve Bank changes interest rates either up or down, it moves money to the already wealthy.
In the New Economy, the Reserve Bank will fix interest rates and keep the inflation of money, goods, and services around zero. Prices will vary according to the effort to create. To control the money supply, the Reserve Bank will specify how interest is shared between the Bank and borrowers depending on the reason for the loan. The default for sharing profits between lenders and borrowers is to divide each loan repayment equally between the interest and the principal, with 50% of the interest charge deducted from the loan balance. With existing bank loans, no interest is deducted from the loan balance.
However, we do not have to wait for the Reserve Bank to mandate the approach, as any Bank with a license to make loans can make shared interest loans. They will prove very popular, and banks who share will outcompete Banks who don't.
They outcompete other Banks because the process with 50% sharing reduces the time to repay a loan by about one-third. It speeds up money, reducing the time to repay a loan. The money that comes back to the Bank can be put into new loans. The velocity of money increases, and if the loans are invested, economic productivity improves by about one-third with 50% sharing.
With sharing, Money Markets do not set the price of money. The price is fixed, and the Bank and communities of borrowers negotiate on the profit share.
Housing Markets versus Money Markets
Housing is unaffordable because wealthy people outbid the less affluent for low-cost houses. Wealthy people and corporations buy multiple homes and rent them out to poorer people who need more cash or access to loans to buy them. The houses become unaffordable because the prices become inflated, money stagnates, and there are unnecessary costs of renting and transferring ownership. These costs typically double the cost of house ownership.
A community that fixes the price of money uses criteria other than monthly repayments to allocate houses. The criteria are based on what is best for the community. In a Housing Market, the optimal allocation for the community is to sell the house to the person with the least money to pay to live there. If multiple people want to live in the same place, the one with the lowest income gets the home. If we allocate houses according to this criterion, housing is affordable for everyone in a community.
It changes the housing market from one where buyers purchase houses to a housing market where the house is the best fit for the buyer. The community can set other non-financial criteria, such as proximity to work, education and services, mobility, and the number of members in the household.
A market where community criteria select occupants can be set to near zero cost while traditional markets cost at least the cost of the house.
Consensus on community criteria is more difficult the larger the community, so communities can divide smaller groups that use standard services to operate their Housing Markets.
If the Housing Market owns the standard services, the economics of Community Capital will apply to standard services. The development of these standard services will bring further savings.
Society has massive gains in financial productivity waiting to be harvested as the same principles apply to all money transactions throughout an economy.
Open-Access Money and Mutual Credit
Any Community can use money as described above. Here it is called Open-Access Money or Community Capital. It combines the advantages of mutual credit and fiat currencies.
Mutual Credit has the following advantages:
- Credit Creation: Unlike traditional banking systems, the currency is created at the point of transaction in a mutual credit system. When a transaction is made, the buyer's account is debited, and the seller's account is credited.
- Zero Balance System: The system is designed to balance at zero. This means that the sum of all debits (negative balances) and credits (positive balances) within the system is zero at any given point. If someone's balance goes negative, someone else's balance goes positive by an equivalent amount.
- Interest-Free: Mutual credit systems are typically interest-free. If a member's account goes negative, they are obligated to provide goods or services to other members until the balance is returned to zero. Still, they usually aren't charged interest on the negative balance.
- Trust and Reciprocity: Mutual credit systems heavily rely on trust and reciprocity among their members. Since no central authority enforces repayments, the system works best when members can trust each other to deliver goods and services as promised and repay negative balances.
- Local or Community-Based: Mutual credit systems often operate within a specific community or region. This helps foster trust and reciprocity among members. Local businesses and consumers can benefit from increased trade within the community.
The advantages of a fiat currency are:
- Stability: Fiat currencies tend to be relatively stable compared to other forms of currency. This stability is primarily because they are regulated by centralised authorities such as central banks, which use various tools (like adjusting interest rates or the amount of money in circulation) to manage inflation, control exchange rates, and stabilise the economy.
- Widespread Acceptance: Fiat currency is recognised and accepted nationally and often internationally. This widespread acceptance facilitates trade and economic activities.
- Controlled Supply: Central banks can control the supply of fiat currency to manage economic situations. They can increase or decrease the money supply to stimulate growth or curb inflation.
- Established Infrastructure: Fiat currencies have the advantage of an established infrastructure for transactions, including a broad network of banking institutions and established payment systems for both physical and digital transactions.
- Legal Tender: Being declared by the government as legal tender, fiat currency must be accepted if offered to pay any debt. This official recognition and enforcement by law make it universally acceptable within a specific geographic territory.
- Flexibility in Monetary Policy: Fiat currency allows governments to employ a range of monetary policies to manage economic fluctuations. These can include measures to control inflation, stimulate economic growth, reduce unemployment, or manage exchange rates.
- No Intrinsic Value Needed: Unlike commodity-based currencies, fiat money does not require a valuable physical commodity for its value. Its value comes from people's trust and confidence in the government's promise to back it.
The advantages of mutual credit are that all money is equal, is interest-free, and communities use reciprocity principles to build trust and transparency. However, the advantages of fiat currencies of universality, flexibility, stability, and established and legal tender almost always outweigh the advantages of interest-free money, particularly for people with a steady, reliable income.
Open-access money or Community Capital
Community Capital or access-free money uses reciprocity principles on fiat currencies to remove interest and treat everyone's money equally. These changes cost little to deploy, can be retrofitted to existing money and improve the productivity of the financial system to pay for the changes many times over.
Extra money appears in the financial system whenever a loan or a business makes a profit. We call the additional money Capital.
With the current system, extra money is kept by the lender or the business owner. The extra money comes from the borrower or the customer. In a balanced reciprocal transaction, the extra money should be shared with the borrower, the customer (or other stakeholders besides the owner). Governments get their share by taxing profits.
With most investments, not everyone can access new Capital, but with open-access Capital, every paying customer can obtain part of the new money.
By sharing interest, every borrower can access some of the new Capital.
Sharing profits and interest allows both to fulfil their function of creating sustainable money and makes new Capital available to all and not just the already wealthy.
Importantly sharing costs little and speeds up the movement of money, making for a fairer, low-cost economy.
